What changed in this filing

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2025-03-14 compared with 2024-03-05 · 330 added, 316 removed, 1815 unchanged (26% of the section changed)

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Yield curve risk is the difference from changing rate relationships across the spectrum of maturities.

Option risk is the difference resulting from interest-related options imbedded in Bank products.

Option risk is the difference resulting from interest-related options embedded in Bank products.

The Bank’s primary source of interest rate risk exposure arises from repricing risk.

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We have audited the accompanying consolidated balance sheets of Hills Bancorporation (the “Company”) as of December 31, 2024 and 2023, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2024, and the related notes (collectively referred to as the “financial statements”).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 5, 2024, expressed an unqualified opinion thereon.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2024 and 2023, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2024, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2024, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 14, 2025, expressed an adverse opinion thereon.

Basis for Opinion

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We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matter communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Credit Losses on Loans and Unfunded Commitments

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of a critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Credit Losses on Loans

Description of the Matter

The Company’s allowance for credit losses on loans was $49.4 million at December 31, 2023.

The Company’s allowance for credit losses on unfunded loan commitments was $5.1 million.

The Company’s allowance for credit losses on loans (the “ACL”) was $50.9 million at December 31, 2024.

As more fully described in Notes 1 and 3 to the financial statements, the ACL is an estimate of lifetime expected credit losses.

The Company uses the discounted cash flow (DCF) method to estimate expected losses for most of the Company’s loan pools that exhibit similar risk characteristics.

these loan pools, the Company generates cash flow projections at the instrument level adjusting payment expectations for estimated prepayment speed, curtailments, time to recovery, probability of default, and loss given default.

The Company uses regression analysis of historical internal and peer data to determine suitable loss drivers when modeling lifetime probability of default and loss given default.

The Company’s analysis also determines how expected probability of default and loss given default will react to forecasted levels of the loss drivers.

The Company uses a discounted cash flow (DCF) model to estimate expected losses for most of the Company’s loan pools that exhibit similar

risk characteristics.

This model calculates an expected loss percentage for each loan class by considering the probability of default, using life-of-loan analysis periods for all loan segments, and the historical severity of loss, based on the aggregate net lifetime losses incurred per loan class.

For each of these loan pools, the Company generates cash flow projections at the instrument level adjusting payment expectations for estimated prepayment speed, curtailments, time to recovery, probability of default, and loss given default.

Additional qualitative adjustments are applied for risk factors that are not considered within the modeling process but are relevant in assessing the expected credit losses within the loan pools.

Management utilizes a qualitative factor framework to provide a qualitative estimate of the expected credit losses inherent in the loan portfolio in relation to potential limitations of the quantitative model.

Loans that do not share risk characteristics are evaluated on an individual basis.

For loans individually evaluated, an allowance is established when the discounted cash flows, collateral value or observable market price of the loan is lower than the carrying value of that loan.

The Company applies anticipated funding percentages to the respective model loss rates to estimate the allowance related to unfunded commitments.

We identified the valuation of ACL as a critical audit matter.

Auditing management’s estimate of these allowances for credit losses involved a high degree of subjectivity due to the complexities of the probability of default and loss given default models, evaluating management’s segmentation methodology, assessment of economic conditions, and the nature of the qualitative factor adjustments.

Management’s qualitative factor adjustments are highly judgmental and had a significant effect on the ACL.

How the Critical Audit Matter was Addressed in the Audit

Our audit procedures related to the ACL included the following procedures, among others:

• Obtained an understanding of the Company’s process for establishing the ACL, including the implementation of models and assumptions and the qualitative factor adjustments of the ACL

• Obtained an understanding, evaluated the design, and tested the operating effectiveness of controls, including information technology, over the reliability and accuracy of data used to calculate and estimate the various components of the ACL including:

◦ Loan data completeness and accuracy,

◦ Grouping of loans by segment,

◦ Model inputs utilized,

◦ Approval of model assumptions selected,

◦ Establishment of qualitative factors, and

◦ Establishment of specific allowances associated with individually evaluated loans

• Tested the mathematical accuracy of the calculations of the ACL;

• Tested individual loan files to evaluate the reasonableness of loan credit risk ratings for disclosure;

• Tested the completeness and accuracy of inputs utilized in the calculation of the ACL;

• Evaluated the reasonableness of selected loss drivers utilized and loss driver forecasts for each loan segment;

• Tested the reasonableness of specific reserves on individually evaluated loans;

• Tested estimated funding rate of unfunded loan commitments;

• Evaluated the qualitative adjustments, including assessing the reasonableness and basis for adjustments;

• Evaluated the accuracy and completeness of Topic 326 disclosures in the consolidated financial statements.

/s/ FORVIS, LLP

We identified the qualitative adjustment component of the ACL as a critical audit matter.

The principal considerations for our determination included the high degree of subjectivity, particularly as it relates to the qualitative factor framework included in the ACL and the overall aggregation of qualitative factors, and therefore, applying audit procedures required a higher degree of auditor judgement and subjectivity.

How We Addressed the Matter in Our Audit

The primary procedures we performed related to this critical audit matter included:

• Obtained an understanding of the Company’s process for establishing the qualitative adjustment estimation process used in the ACL, including the key assumptions used to develop the qualitative adjustment framework.

• Obtained an understanding and evaluated and tested the design and operating effectiveness of controls relating to management’s estimate of the ACL, including controls over:

◦ The completeness and accuracy of loan data;

◦ The identification of key qualitative factors, including whether the key qualitative factor adjustments are adequately supported and accurately applied.

• Evaluated the reasonableness of the key assumptions and data used to develop the qualitative adjustment framework, including considering the key data’s completeness and accuracy within the model.

• Evaluated the mathematical accuracy of the ACL model used, as well as the method for developing the qualitative adjustments.

• Evaluated the reasonableness of the overall ACL amount, including model estimates and qualitative adjustments, and whether the recorded ACL appropriately reflects expected credit losses on the loan portfolio.

We reviewed historical loss statistics and peer-bank information and considered whether they corroborate or contradict the Company’s measurement of the ACL.

/s/ Forvis Mazars, LLP

We have served as the Company’s auditor since 2012.

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Opinion on the Internal Control over Financial Reporting

We have audited Hills Bancorporation’s (the “Company”) internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework:

(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework:

(2013) issued by (COSO).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements of the Company as of December 31, 2023 and 2022, and for each of the three years in the period ended December 31, 2023, and our report dated March 5, 2024, expressed an unqualified opinion on those financial statements.

We have audited Hills Bancorporation’s (the “Company”) internal control over financial reporting as of December 31, 2024, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

The following material weaknesses have been identified and included in management’s assessment.

• The Company did not maintain effective controls, including certain management review controls and activity-level controls, over the period-end financial reporting process.

• The Company did not maintain effective controls over the segregation of duties, review, posting, and approval of manual journal entries.

• The Company did not maintain effective controls over the review, analysis, approval, and disclosure of related party transactions.

These material weaknesses were considered in determining the nature, timi ng, and extent of auditing procedures applied in our audit of the Company’s consolidated financial statements, and this report does not affect our report dated March 14, 2025, on those consolidated financial statements.

In our opinion, because of the effect of the material weaknesses described above on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2024, based on criteria established in Internal Control – Integrated Framework (2013) issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of December 31, 2024 and 2023, and for each of the years in the three-year period ended December 31, 2024, and our report dated March 14, 2025, expressed an unqualified opinion on those financial statements.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on the Internal Controls over Financial Reporting.

Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

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Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.

the assessed risk.

Our audit also included performing such other procedures as we considered necessary in the circumstances.

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(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

and (3) provide reasonable assurance regarding prevention, or timely detection and correction of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

/s/ FORVIS, LLP

/s/ Forvis Mazars, LLP

Springfield, Missouri

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Net interest income 115,823 113,886 115,002

Credit loss expense (benefit) (Note 3) 15,621 6,340 ( 5,507 )

Net interest income after credit loss expense (benefit) 98,265 108,662 109,969

Credit loss expense (Note 3) 2,208 15,621 6,340

Net interest income after credit loss expense 113,615 98,265 108,662

Noninterest income:

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Other noninterest income 1,512 541 1,333

Loss on sale of investment securities ( 5,217 ) — —

26,821 28,606 27,780

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Occupancy 4,266 4,408 4,549

Furniture and equipment 6,835 6,937 7,276

Furniture, equipment and software 6,757 6,835 6,937

Office supplies and postage 2,043 1,879 1,837

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Net change in unrealized gain (loss) on securities available for sale ( 5,518 ) 18,780 ( 56,166 )

Reclassification adjustment for net losses realized in net income 5,217 — —

Income taxes 71 ( 4,719 ) 13,629

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Derivatives used in cash flow hedging relationships:

Net change in unrealized loss on derivatives ( 233 ) — —

Net change in unrealized gain (loss) on derivatives 141 ( 233 ) —

Income taxes ( 35 ) 56 —

Other comprehensive (loss) on cash flow hedges ( 177 ) — —

Other comprehensive (loss) income, net of tax 13,884 ( 42,537 ) ( 7,305 )

Other comprehensive gain (loss) on cash flow hedges 106 ( 177 ) —

Other comprehensive income (loss), net of tax ( 124 ) 13,884 ( 42,537 )

Comprehensive income $ 47,480 $ 52,060 $ 5,216

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Balance, December 31, 2021 $ 60,938 $ 474,392 $ 1,477 $ ( 48,344 ) $ ( 50,013 ) $ 438,450

Cumulative change in accounting principle (Note 1) — ( 4,751 ) — — — ( 4,751 )

Balance, January 1, 2021 (as adjusted for change in accounting principle) 60,233 435,080 8,782 ( 45,441 ) ( 47,329 ) 411,325

Issuance of 43,655 shares of common stock

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— — — ( 7,710 ) — ( 7,710 )

Other comprehensive (loss) — — ( 42,537 ) — — ( 42,537 )

Excise tax on shares repurchased — — — ( 66 ) — ( 66 )

Other comprehensive income — — 13,884 — — 13,884

Balance, December 31, 2023 $ 63,827 $ 541,329 $ ( 27,176 ) $ ( 62,841 ) $ ( 44,853 ) $ 470,286

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Excise tax on shares repurchased — — — ( 102 ) — ( 102 )

Other comprehensive income — — 13,884 — — 13,884

Other comprehensive loss — — ( 124 ) — — ( 124 )

Balance, December 31, 2024 $ 64,644 $ 578,882 $ ( 27,300 ) $ ( 75,282 ) $ ( 48,257 ) $ 492,687

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Depreciation 2,243 2,315 2,683

Credit loss expense (benefit) 15,621 6,340 ( 5,507 )

Credit loss expense 2,208 15,621 6,340

Loss on sale of investment securities available for sale 5,217 — —

Share-based compensation 23 25 25

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Net gain on sale of other real estate owned and other repossessed assets ( 122 ) ( 154 ) ( 86 )

(Increase) decrease in accrued interest receivable ( 4,004 ) ( 4,345 ) 740

Net loss on disposal of property 616 — —

(Increase) in accrued interest receivable ( 1,617 ) ( 4,004 ) ( 4,345 )

(Accretion of discount) amortization of premium on investment securities, net ( 944 ) ( 480 ) 30

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Proceeds on sale of other real estate owned and other repossessed assets 304 815 337

Proceeds from sale of property and equipment 4 — —

Purchases of property and equipment ( 4,501 ) ( 3,027 ) ( 1,911 )

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Cash Flows from Financing Activities

Net (decrease) increase in deposits ( 74,587 ) ( 176,627 ) 341,426

Net increase (decrease) in deposits 63,353 ( 74,587 ) ( 176,627 )

Net increase in short-term borrowings, including Bank Term Funding Program and federal funds purchased 328,362 136,939 81,812

Net increase (decrease) in Federal Home Loan Bank borrowings 256,648 40,000 ( 105,000 )

Principal payments on long-term FHLB borrowings ( 255,224 ) — —

Proceeds from the issuance of long-term FHLB borrowings 84,900 256,648 40,000

Borrowings from Federal Reserve Bank 1 3,005 1

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Stock options exercised — — 238

Excise tax paid on shares repurchased ( 56 ) — —

Purchase of treasury stock ( 12,902 ) ( 7,710 ) ( 7,906 )

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Noncash financing activities:

(Decrease) increase in maximum cash obligation related to ESOP shares $ ( 6,158 ) $ 998 $ 2,684

Increase (decrease) in maximum cash obligation related to ESOP shares $ 3,404 $ ( 6,158 ) $ 998

Transfers to other real estate owned 1,097 764 206

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The Company's subsidiary is Hills Bank and Trust Company, Hills, Iowa (the “Bank”), which is wholly-owned.

The Bank is a full-service commercial bank extending its services to individuals, businesses, governmental units and institutional customers primarily in the communities of Hills, Iowa City, Coralville, North Liberty, Lisbon, Mount Vernon, Kalona, Wellman, Cedar Rapids, Marion and Washington, Iowa.

The Bank competes with other financial institutions and non-financial institutions providing similar financial products.

While the chief operating decision-makers monitor the revenue streams of the various products and services, operations are managed, and financial performance is evaluated on a Company-wide basis.

Although the loan activity of the Bank is diversified with commercial and agricultural loans, real estate loans, automobile, installment and other consumer loans, the Bank's credit is concentrated in real estate loans.

All of the Company’s operations are considered to be one reportable operating segment.

Accordingly, all of the Company’s operations are considered by management to be aggregated in one reportable operating segment.

Accounting estimates :

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As of December 31, 2024 and 2023, the Company did not have any significant contract balances.

An entity is required to capitalize, and subsequently amortize into expense, certain incremental costs of obtaining a contract with a customer if these costs are expected to be recovered.

The incremental costs of obtaining a contract are those costs that an

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, sales commission).

An entity is required to capitalize, and subsequently amortize into expense, certain incremental costs of obtaining a contract with a customer if these costs are expected to be recovered.

The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, sales commission).

The Company utilizes the practical expedient which allows entities to immediately expense contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less.

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If we intend to sell a debt security or more likely than not we will be required to sell the security before recovery of its amortized cost basis, the debt security is written down to its fair value and the write down is charged against the allowance for credit losses with any incremental impairment reported in earnings.

Accrued interest receivable on AFS debt securities totaled $ 3.97 million and $ 3.61 million at December 31, 2023 and 2022, respectively, and is excluded from the estimate of credit losses.

Accrued interest receivable on AFS debt securities , stock of the Federal Home Loan Bank, and Federal Reserve excess balance account totaled $ 6.10 million and $ 3.97 million at December 31, 2024 and 2023, respectively, and is excluded from the estimate of credit losses.

Stock of the Federal Home Loan Bank is carried at cost.

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Loans held for sale are stated at the lower of aggregate cost or estimated fair value.

Loans are sold on a non-recourse basis with servicing released and gains and losses are recognized based on the difference between sales proceeds and the carrying value of the loan.

The Company has had very few experiences of repurchasing loans previously sold into the secondary market.

A specific reserve was not considered necessary based on the Company’s historical experience with repurchase activity.

Loans are sold on a non-recourse basis with servicing released and gains and losses are recognized based on the difference between sales proceeds

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

and the carrying value of the loan.

The Company has had very few experiences of repurchasing loans previously sold into the secondary market.

A specific reserve was not considered necessary based on the Company’s historical experience with repurchase activity.

Loans held for investment :

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Agricultural operating loans generally have a term of one year and may have a fixed or variable rate.

Key economic forecasts used in estimating expected credit losses for this segment include the Iowa unemployment rate and the Iowa real gross domestic product (GDP) as of December 31, 2023 and the Iowa unemployment rate and the National real gross domestic product (GDP) as of December 31, 2024.

The change is due to the annual reevaluation of key loss drivers for expected credit losses within the Company's loan portfolio.

The change to the National GDP was due to forecast information being more readily available.

Mortgage loans secured by farmland are made to individuals and businesses within the Company's trade area.

The primary source of repayment is the cash flow generated by the collateral underlying the loan.

The secondary repayment source would be the liquidation of the collateral.

Terms for real estate loans secured by farmland range from one to ten years with an amortization period of 25 years or less.

Generally, interest rates are fixed for mortgage loans secured by farmland.

Key economic forecasts used in estimating expected credit losses for this segment include the Iowa unemployment rate and the Iowa real gross domestic product (GDP).

1 to 4 Family First and Junior Liens - The 1 to 4 family first and junior liens portfolio segment is comprised of the single family and home equity loan classes, which are underwritten after evaluating a borrower's capacity to repay,

The secondary

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

credit, and collateral.

repayment source would be the liquidation of the collateral.

Terms for real estate loans secured by farmland range from one to ten years with an amortization period of 25 years or less.

Generally, interest rates are fixed for mortgage loans secured by farmland.

The change is due to the annual reevaluation of key loss drivers for expected credit losses within the Company's loan portfolio.

The change to the National GDP was due to forecast information being more readily available.

Several factors are considered when assessing a borrower's capacity, including the borrower's employment, income, current debt, assets, and level of equity in the property.

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These borrowers are particularly susceptible to downturns in economic trends such as conditions that negatively affect housing prices and demand and levels of unemployment.

Key economic forecasts used in estimating expected credit losses for this segment include the Iowa unemployment rate and the all-transactions house price index for Iowa.

Key economic forecasts used in estimating expected credit losses for this segment include the Iowa unemployment rate and the all-transactions house price index for Iowa as of December 31, 2023 and the Iowa unemployment rate as of December 31, 2024.

The change is due to the annual reevaluation of key loss drivers for expected credit losses within the Company's loan portfolio.

The change to only Iowa unemployment was due to the Iowa unemployment rate being a significant driver for expected credit losses.

Commercial - The commercial loan portfolio segment is comprised of the commercial real estate mortgage, multifamily residential mortgage, construction/land development and commercial and financial loan classes, whose underwriting standards consider the factors described for single family and home equity loan classes as well as others when assessing the borrower's and associated guarantors or other related party's financial position.

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Ultimate repayment of these loans is sensitive to interest rate changes, general economic conditions, liquidity, and availability of long-term financing.

Key economic forecasts used in estimating expected credit losses for this segment include the Iowa unemployment rate, the all-transactions house price index for Iowa and the Iowa real GDP.

Key economic forecasts used in estimating expected credit losses for this segment include the Iowa unemployment rate, the all-transactions house price index for Iowa and the Iowa real GDP as of December 31, 2023 and the Iowa unemployment rate and the National real gross domestic product as of December 31, 2024.

The change is due to the annual reevaluation of key loss drivers for expected credit losses within the Company's loan portfolio.

The change to the National GDP was due to forecast information being more readily available and the Iowa unemployment rate being a significant driver for expected credit losses.

Consumer Lending - The Bank offers consumer loans to individuals including personal loans and automobile loans.

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The collateral securing these loans may depreciate over time, may be difficult to recover and may fluctuate in value based on condition.

Key economic forecasts used in estimating expected credit losses for this segment include the Iowa unemployment rate and the Iowa real GDP.

Key economic forecasts used in estimating expected credit losses for this segment include the Iowa unemployment rate and the Iowa real GDP as of December 31, 2023 and the Iowa unemployment rate and the National real gross domestic product as of December 31, 2024.

The change is due to the annual reevaluation of key loss drivers for expected credit losses within the Company's loan portfolio.

The change to the National GDP was due to forecast information being more readily available.

The allowance level is influenced by loan volumes, loan credit quality indicator migration or delinquency status, historic loss experience and other conditions influencing loss expectations, such as reasonable and supportable forecasts of economic conditions.

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first, a pooled component for estimated expected credit losses for pools of loans that share similar risk characteristics;

and second, an asset-specific component involving individual loans that do not share risk characteristics with other loans and the measurement of expected credit losses for such individual loans.

and second, an asset-specific component involving individual loans that do not share risk characteristics

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

with other loans and the measurement of expected credit losses for such individual loans.

Depending on the nature of the pool of financial assets with similar risk characteristics, the Company uses a discounted cash flow method or remaining life method to estimate expected credit losses.

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(1) lending policies and procedures;

(2) international, national, regional and local economic business conditions and developments that affect the collectability of the portfolio;

(2) international, national, regional and local economic business conditions and developments that affect the collectability of the portfolio, including the condition of various markets;

(3) the nature and volume of the loan portfolio including the terms of the loans;

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(5) the volume and severity of past due and adversely classified or graded loans and the volume of nonaccrual loans;

(6) the quality of our loan review system and (7) the value of underlying collateral for collateralized loans.

Additional factors include the existence and effect of any concentrations of credit, and changes in the level of such concentrations and the effect of external factors such as competition

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

and legal and regulatory requirements on the level of estimated credit losses in the existing portfolio.

(6) the quality of our loan review system;

(7) the value of underlying collateral for collateral-dependent loans;

(8) the existence and effect of any concentrations of credit and changes in the level of such concentrations;

and (9) the effect of external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the existing portfolio.

Such factors are used to adjust the historical probabilities of default and severity of loss so that they reflect management expectation of future conditions based on a reasonable and supportable forecast.

The framework provides for a level of risk approach to measure risk in each loan segment that may not be captured in the quantitative methodology, including improved risk environment, no additional risk, minimal additional risk, moderate risk and major or significant additional risk.

The framework also includes a weighting component for management to consider which qualitative factors would have the highest impact on potential loan losses within each loan segment.

Management uses the qualitative factor framework within the allowance for credit losses calculation to assess the risk level environment for each qualitative factor and weightings for each loan segment which is supported by various information including publicly available information, internal information specifically developed by management, or other relevant and reliable information.

The Company uses regression analysis of historical internal and peer data to determine which variables are best suited to be economic variables utilized when modeling lifetime probability of default and loss given default.

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This is done by estimating the amount and timing of principal payments expected to be received as payment for the balance outstanding as of the reporting period and applying those principal payments against the balance outstanding as of the reporting period along with the average annual charge-off rate until the expected payments have been fully allocated.

Management applies the same qualitative factor framework for the remaining life method loan portfolios as the framework used for the discounted cash flow method loan portfolios.

Collateral dependent financial assets :

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For these loans, we recognize expected credit loss equal to the amount by which the net realizable value of the loan is less than the amortized cost basis of the loan (which is net of previous charge-offs and deferred loan fees and costs), except when the loan is collateral dependent, that is, when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral.

In these cases, expected credit loss is measured as the difference between the amortized cost basis of the loan and the fair value of the collateral.

In these cases, expected credit loss is measured as the difference between the amortized cost

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

basis of the loan and the fair value of the collateral.

The fair value of the collateral is adjusted for the estimated cost to sell if repayment or satisfaction of a loan is dependent on the sale (rather than only on the operation) of the collateral.

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Categories of OBS credit exposures correspond to the loan portfolio segments described previously.

Troubled debt restructurings (“TDR loans”) :

Prior to January 1, 2023, a loan was accounted for and reported as a troubled debt restructuring ("TDR") when, for economic or legal reasons, the Company granted a concession to a borrower experiencing financial difficulty that the Company would not otherwise consider.

These concessions could include rate reductions, principal forgiveness, extension of maturity date and other actions intended to minimize potential losses to the Company.

A restructuring that resulted in only an insignificant delay in payment was not considered a concession.

TDRs that are performing and on accrual status as of the date of the modification remain on accrual status.

TDRs that are nonperforming as of the date of modification generally remain as nonaccrual until the prospect of future payments in accordance with the modified loan agreement is reasonably assured, generally demonstrated when the borrower maintains compliance with the restructured terms for a predetermined period, normally at least six months.

TDRs with temporary below-

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

market concessions remain designated as a TDR regardless of the accrual or performance status until the loan is paid off.

Transfers of financial assets :

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Tax credit real estate represents three multi-family rental properties, three assisted living rental properties, a multi-tenant rental property for persons with disabilities, and a multi-family senior living rental property, all of which are affordable housing projects as of December 31, 2024.

The Bank has a 99 % or greater limited partnership interest in each limited partnership.

The investment in each was completed after the projects had been developed by the general partner.

On a regular basis, the Company evaluates recoverability of the carrying value of the tax credit real estate investments to determine if an allowance for credit losses is necessary.

The allowance for credit losses is measured by a comparison of the carrying amount of the investments to the future undiscounted cash flows expected to be generated by the investment properties, including the low-income housing tax credits and any estimated proceeds from eventual disposition.

If there is an indication of impairment, the allowance for credit losses would be established with a charge to credit loss expense.

There were no indications of impairment based on management's evaluation and therefore no allowance for credit losses was determined necessary as of December 31, 2023 and 2022.

In addition, in July 2024, the Company made a tax equity investment in an entity to provide for the historic preservation of a mixed use property in Cedar Rapids, Iowa.

The Company has a 99 % or greater limited partnership interest in each limited partnership or company.

The investment in each was completed after the projects had been developed by the general partner or managing member.

On a regular basis, the Company evaluates recoverability of the carrying value of the tax credit real estate investments to determine if there are indications of impairment.

This is measured by a comparison of the carrying amount of the investments to the future undiscounted cash flows expected to be generated by the investment properties, including the low-income housing tax credits and any estimated proceeds from eventual disposition.

If there is an indication of impairment, a valuation allowance would be established with a charge to expense.

There were no indications of impairment based on management's evaluation and therefore no valuation allowance was determined necessary as of December 31, 2024 and 2023.

Depreciation expense is provided on a straight-line basis over the estimated useful life of the assets.

Expenditures for normal repairs and maintenance are charged to expense as incurred.

The investments in tax credit real estate are recorded for all years presented using the equity method of accounting, with the exception of the investment in the affordable housing project described below.

The investments in tax credit real estate are recorded for all years presented using the equity method of accounting, with the exception of the investments in the affordable housing project and historic preservation project described below.

The operations of the properties are not expected to contribute significantly to the Company’s income before income taxes.

However, the properties do contribute in the form of income tax credits, which lowers the Company’s effective tax rate.

Once established, the credits on each property last for ten years and are passed through from the limited partnerships to the Bank and reduces the consolidated federal tax liability of the Company.

Once established, the credits on each property last for ten years , five years for the historic preservation property, and are passed through from the limited partnerships or entity to the Company and reduces the consolidated federal tax liability of the Company.

In February 2021, the Company provided construction financing and contributed capital of $ 4.18 million to Del Ray Ridge LP, as limited partner, which owns and operates an affordable housing property in Iowa City, Iowa.

The Company accounts for the investment in this tax credit real estate using the proportional amortization method as provided for under Accounting Standards Codification (ASC) 323-740.

The Company accounts for the investment in this tax credit real estate using the proportional amortization method as provided for under Accounting Standards

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Codification (ASC) 323-740.

The investment qualifies for the proportional amortization method as it meets all of the criteria under ASC 323-740-25-1.

Substantially all of the projected benefits are from tax credits and other tax benefits due to the minimum buyout clause included in the partnership agreement.

In July 2024, the Company provided construction financing and contributed capital of $ 2.38 million to SLE Iowa Building, LC, as investor member, which owns and operates a historically preserved mixed use property in Cedar Rapids, Iowa.

An additional $ 1.25 million of contributions to capital will be due upon certain conditions being met which are anticipated to occur in 2025.

The Company accounts for the investment in this tax credit real estate using the proportional amortization method as provided for under Accounting Standards Codification (ASC) 323-740.

The investment qualifies for the proportional amortization method as it meets all of the criteria under ASC 323-740-25-1.

Substantially all of the projected benefits are from tax credits and other tax benefits due to the minimum buyout clause included in the operating agreement

Property and equipment :

11 unchanged sentences

As of December 31, 2024 and 2023, the Company had no material unrecognized tax benefits.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Goodwill represents the excess of cost over the fair value of the net assets acquired, and is not subject to amortization, but requires, at a minimum, annual impairment tests for intangibles that are determined to have an indefinite life.

16 unchanged sentences

The Bank does not use derivatives for trading or speculative purposes.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Earnings per share:

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Stock awards and options :

Compensation expense for stock issued through the stock award plan is accounted for using the fair value method prescribed by FASB ASC 718, “Share-Based Payment” (“ASC 718”).

Compensation expense for stock and stock options issued through the stock award plan is accounted for using the fair value method prescribed by FASB ASC 718, “Share-Based Payment” (“ASC 718”).

Under this method, compensation expense is measured and recognized for all stock-based awards made to employees and directors based on the fair value of each award as of the date of the grant.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Common stock held by ESOP :

6 unchanged sentences

Accounting guidance adopted in 2024

On January 1, 2021, the Company adopted Accounting Standards Update (ASU) 2016-13 Financial Instruments - Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments , which requires the recognition of the allowance for credit losses be estimated using the current expected credit loss (CECL) methodology.

The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities.

It also applies to off-balance sheet (OBS) credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with Topic 842 on leases.

In addition, ASC 326 made changes to the accounting for available-for-sale debt securities.

One such change is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities that are determined to have impairment related to credit losses.

The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and OBS credit exposures.

Results for reporting periods beginning January 1, 2021 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP.

The Company recorded a net decrease to retained earnings of $ 4.75 million as of January 1, 2021 for the cumulative effect of adopting ASC 326, which includes deferred taxes of $ 1.58 million.

The transition adjustment includes a $ 2.75 million increase to the Allowance for Credit Losses and the recording of a $ 3.58 million Allowance for Credit Losses on OBS Credit Exposures.

The following table illustrates the impact of ASC 326 (amounts in thousands).

January 1, 2021

As Reported Under ASC 326 Pre-ASC 326 Adoption Impact of ASC 326 Adoption

Allowance for credit losses on loans $ 39,816 $ 37,070 $ 2,746

Allowance for credit losses on off-balance sheet credit exposures $ 3,584 $ — $ 3,584

Accounting guidance adopted in 2023

In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 815) Accounting for Contract Assets and Contract Liabilities from Contracts with Customers .

The amendments in this Update require that an entity (acquirer) recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606.

At the acquisition date, an acquirer should account for the related revenue contracts in accordance with Topic 606 as if it had originated the contracts.

To achieve this, an acquirer may assess how the acquiree applied Topic 606 to determine what to

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

record for the acquired revenue contracts.

The amendments in this ASU are effective for all entities for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.

An entity should apply the amendments prospectively to business combinations occurring on or after the effective date of the amendments.

The adoption of the ASU by the Company on January 1, 2023 did not have a material impact on the financial statements.

In March 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures .

The FASB issued these amendments to eliminate accounting guidance for TDRs by creditors in Subtopic 310-40, Receivables-Troubled Debt Restructurings by Creditors , while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty, and to require that an entity disclose current-period gross writeoffs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, Financial Instruments-Credit Losses-Measured at Amortized Cost .

The amendments in this Update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, and should be applied prospectively, except as provided in the next sentence.

For the transition method related to the recognition and measurement of TDRs, an entity has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption.

Early adoption is permitted if an entity has adopted the amendments in Update 2016-03, including adoption in an interim period.

The adoption of the ASU on a prospective basis by the Company on January 1, 2023 did not have a material impact on the financial statements, however it resulted in new disclosures.

Accounting guidance pending adoption as of December 31, 2023

In March 2023, the FASB issued ASU 2023-02, Investments - Equity Method and Joint Ventures (Topic 323) Accounting for Investments in Tax Credit Structures Using Proportional Amortization Method .

4 unchanged sentences

If an entity adopts the amendments in an interim period, it shall adopt them as of the beginning of the fiscal year that includes that interim period.

The Company is in the process of evaluating the impact of this ASU on the financial statements.

The adoption of the ASU on a prospective basis by the Company on January 1, 2024 did not have a material impact on the financial statements.

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280) Improvements to Reportable Segment Disclosures .

The FASB is issuing this ASU to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses.

For public business entities, the amendments are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024.

For public business entities, the amendments are effective for fiscal

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024.

Early adoption is permitted.

1 unchanged sentence

Upon transition, the segment expense categories and amounts disclosed in the prior periods should be based on the significant segment expense categories identified and disclosed in the period of adoption.

The Company is in the process of evaluating the impact of this ASU on the financial statements.

The Company adopted the ASU on January 1, 2024.

See disclosure in Note 18.

Accounting guidance pending adoption as of December 31, 2024

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740) Improvements to Income Tax Disclosures .

5 unchanged sentences

The Company is in the process of evaluating the impact of this ASU on the financial statements.

In March 2024, the FASB issued ASU 2024-01, Compensation - Stock Compensation (Topic 718) Scope Application of Profits Interest and Similar Awards .

The FASB is issuing this ASU to improve generally accepted accounting principles by adding an illustrative example to demonstrate how an entity should apply the scope guidance to determine whether profits interest and similar awards ("profit interest awards") should be accounted for in accordance with Topic 718, Compensation - Stock Compensation.

The illustrative example is intended to reduce 1) complexity in determining whether a profits interest award is subject to the guidance in Topic 718 and 2) existing diversity in practice.

For public business entities, the amendments are effective for annual periods beginning after December 15, 2024, and interim periods within those annual periods.

Early adoption is permitted for both interim and annual financial statements that have not yet been issued or made available for issuance.

The amendments in this Update should be applied either (1) retrospectively to all prior periods presented in the financial statements or (2) prospectively to profits interest and similar awards granted or modified on or after the date at which the entity first applies the amendments.

The Company is in the process of evaluating the impact of this ASU on the financial statements.

In November 2024, the FASB issued ASU 2024-03, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40):

Disaggregation of Income Statement Expenses.

This ASU requires public companies to disclose, in the notes to financial statements, specified information about certain costs and expenses at each interim and annual reporting period.

Specifically, they will be required to:

• Disclose the amounts of (a) employee compensation;

and (b) depreciation included in each relevant expense caption.

• Include certain amounts that are already required to be disclosed under current generally accepted accounting principles (GAAP) in the same disclosure as the other disaggregation requirements.

• Disclose a qualitative description of the amounts remaining in relevant expense captions that are not separately disaggregated quantitatively.

• Disclose the total amount of selling expenses and, in annual reporting periods, an entity’s definition of selling expenses.

This ASU is effective for public business entities for annual reporting periods beginning after December 15, 2026, and interim reporting periods beginning after December 15, 2027.

Early adoption is permitted.

A public business entity should apply ASU No.

2024-03 prospectively to financial statements issued for reporting periods beginning after the effective date of ASU No.

The disclosures required ASU No.

2024-03 do not need to be included in financial statements for reporting periods beginning before the effective date that are being presented for comparative purposes with financial statements issued for periods after the effective date.

The Company is in the process of evaluating the impact of this ASU on the financial statements.

HILLS BANCORPORATION

69 unchanged sentences

116 $ 36,900 ( 316 ) 0.86 % 786 $ 611,806 ( 38,016 ) 6.21 % 902 $ 648,706 $ ( 38,332 ) 5.91 %

The Company considered the following information in reaching the conclusion that the impairments disclosed in the table above are not attributable to credit losses.

None of the unrealized losses in the above table was due to the deterioration in the credit quality of any of the issues that might result in the non-collection of contractual principal and interest.

The Company considered the following information in reaching the conclusion that the unrealized losses disclosed in the table above are not attributable to credit losses.

None of the unrealized losses in the above table were due to the deterioration in the credit quality of any of the issues that might result in the non-collection of contractual principal and interest.

The unrealized losses are due to changes in interest rates.

The Company has not recognized any unrealized loss in income because management does not have the intent to sell the securities included in the previous table.

The Company completed a balance sheet repositioning related to its investment securities portfolio in December 2024.

This consisted of the sale of lower-yielding AFS debt securities with an amortized cost of $ 135.05 million, resulting in a pre-tax realized loss on the sale of $ 5.22 million, which was recorded in December of 2024.

All of the proceeds from the sale of these securities were used to purchase AFS debt securities at higher yields to improve income going forward, while maintaining the liquidity provided by the investment portfolio.

Management has concluded that it is more likely than not that the Company will not be required to sell these securities prior to recovery of the amortized cost basis.

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ACL on loans:

Beginning balance, prior to adoption of ASC 326 $ 2,508 $ 4,885 $ 2,319 $ 4,173 $ 12,368 $ 9,415 $ 1,402 $ 37,070

Impact of adopting ASC 326 ( 328 ) 298 327 763 522 1,396 ( 232 ) 2,746

Beginning balance $ 2,261 $ 4,269 $ 2,300 $ 3,433 $ 11,498 $ 10,498 $ 1,211 $ 35,470

Charge-offs ( 357 ) ( 447 ) — ( 40 ) ( 729 ) ( 51 ) ( 589 ) ( 2,213 )

Recoveries 83 584 48 296 898 361 153 2,423

Provision 45 ( 1,881 ) ( 437 ) ( 1,527 ) ( 1,874 ) ( 311 ) 212 ( 5,773 )

Credit loss (benefit) expense 555 1,853 1,841 ( 700 ) 2,541 ( 1,392 ) 1,062 5,760

Ending balance $ 2,542 $ 6,259 $ 4,189 $ 2,989 $ 14,208 $ 9,416 $ 1,837 $ 41,440

18 unchanged sentences

Ending balance $ 147 $ 1,753 $ 486 $ 13 $ 412 $ 46 $ 43 $ 2,900

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Year Ended December 31, 2023

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Beginning balance $ 383 $ 1,118 $ 849 $ 113 $ 794 $ 559 $ 34 $ 3,850

Impact of adopting ASC 326 385 1,585 736 180 471 212 15 3,584

Credit loss (benefit) expense 142 ( 19 ) 1,277 ( 58 ) ( 323 ) ( 437 ) ( 2 ) 580

45 unchanged sentences

A special mention credit would typically have a weakness in one of the general categories (cash flow, collateral position or payment history) but not in all categories.

Potential indicators of a special mention would include past due payments, overdrafts, management issues, poor financial performance, industry issues, or the need for additional short-term borrowing.

The ability to continue to make payments is in question;

there are “red flags” such as past due payments, non-

Potential indicators of a special mention would include past due payments, overdrafts, management issues, poor financial performance, industry issues, or the need for additional short-term

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

revolving credit lines, overdrafts, and the inability to sell assets.

The ability to continue to make payments is in question;

there are “red flags” such as past due payments, non-revolving credit lines, overdrafts, and the inability to sell assets.

The borrower is experiencing delinquent taxes, legal issues, etc., obtaining financial information has become a challenge, collateral coverage is marginal at best, and the value and condition could be brought into question.

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Problems may be the result of external issues such as economic or industry related issues.

The following tables present the credit quality indicators and origination years by type of loan in each category as of December 31, 2023 and 2022 (amounts in thousands):

The following tables present the credit quality indicators and origination years by type of loan in each category as of December 31, 2024 (amounts in thousands):

December 31, 2024 2024 2023 2022 2021 2020 Prior Revolving Loans Amortized Cost Basis Total

7 unchanged sentences

Current period gross write-offs $ 652 $ 7 $ 4 $ 1 $ — $ — $ 5 $ 669

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Commercial and Financial

December 31, 2023 2023 2022 2021 2020 2019 Prior Revolving Loans Amortized Cost Basis Total

Excellent $ 781 $ 131 $ 220 $ 120 $ 266 $ — $ 7,438 $ 8,956

6 unchanged sentences

Current period gross write-offs $ 1,109 $ 1,029 $ 202 $ 117 $ 36 $ — $ 75 $ 2,568

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Construction, 1 to 4 Family Residential

8 unchanged sentences

Current period gross write-offs $ 38 $ 552 $ 44 $ — $ — $ — — $ 634

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Construction, Land Development and Commercial

December 31, 2023 2023 2022 2021 2020 2019 Prior Revolving Loans Amortized Cost Basis Total

Excellent $ 910 $ — $ — $ — $ — $ 87 $ 880 $ 1,877

7 unchanged sentences

Mortgage, Farmland

December 31, 2023 2023 2022 2021 2020 2019 Prior Revolving Loans Amortized Cost Basis Total

Excellent $ 1,805 $ 1,770 $ 3,734 $ 1,734 $ 127 $ — $ 80 $ 9,250

6 unchanged sentences

Current period gross write-offs $ — $ 37 $ 2 $ — $ — $ — $ — $ 39

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Mortgage, 1 to 4 Family First Liens

December 31, 2023 2023 2022 2021 2020 2019 Prior Revolving Loans Amortized Cost Basis Total

Excellent $ 3,575 $ 6,675 $ 9,533 $ 1,324 $ 209 $ 562 $ 1 $ 21,879

6 unchanged sentences

Current period gross write-offs $ 41 $ 209 $ 238 $ 167 $ 27 $ 31 $ 27 $ 740

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Mortgage, 1 to 4 Family Junior Liens

8 unchanged sentences

Current period gross write-offs $ — $ 152 $ 84 $ 87 $ 25 $ 56 $ 7 $ 411

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Mortgage, Multi-Family

December 31, 2023 2023 2022 2021 2020 2019 Prior Revolving Loans Amortized Cost Basis Total

Excellent $ — $ — $ 5,541 $ 2,857 $ 8,048 $ 79 $ 1 $ 16,526

7 unchanged sentences

Mortgage, Commercial

December 31, 2023 2023 2022 2021 2020 2019 Prior Revolving Loans Amortized Cost Basis Total

Excellent $ 1,529 $ 1,389 $ — $ 2,066 $ 12,428 $ 248 $ 3,858 $ 21,518

6 unchanged sentences

Current period gross write-offs $ 61 $ 3 $ 8 $ 109 $ 5 $ — $ 17 $ 203

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Loans to Individuals

December 31, 2023 2023 2022 2021 2020 2019 Prior Revolving Loans Amortized Cost Basis Total

Excellent $ — $ — $ — $ — $ — $ — $ 1 $ 1

6 unchanged sentences

Current period gross write-offs $ 1,084 $ 356 $ 45 $ 5 $ — $ — $ — $ 1,490

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Obligations of State and Political Subdivisions

8 unchanged sentences

Current period gross write-offs $ — $ — $ — $ — $ — $ — $ — $ —

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Excellent $ 9,639 $ 10,039 $ 19,711 $ 8,101 $ 21,113 $ 4,114 $ 26,573 $ 99,290

Good 30,851 65,918 107,926 54,780 51,986 44,560 78,901 434,922

Satisfactory 252,963 294,128 472,740 265,041 178,529 187,363 401,106 2,051,870

Monitor 107,339 68,270 108,024 66,455 47,907 23,004 244,407 665,406

Special Mention 20,432 18,529 26,582 19,660 7,949 5,839 23,332 122,323

Substandard 14,996 6,580 13,589 8,025 4,280 7,874 9,016 64,360

Total $ 436,220 $ 463,464 $ 748,572 $ 422,062 $ 311,764 $ 272,754 $ 783,335 $ 3,438,171

Gross write-offs for period $ 3,002 $ 2,421 $ 627 $ 508 $ 93 $ 98 $ 131 $ 6,880

The following tables present total loans by risk categories and gross charge-offs by year of origination as of December 31, 2023 (amounts in thousands):

December 31, 2023 2023 2022 2021 2020 2019 Prior Revolving Loans Amortized Cost Basis Total

6 unchanged sentences

Total $ 19,426 $ 15,963 $ 4,082 $ 2,759 $ 1,456 $ 913 $ 71,187 $ 115,786

Current period gross write-offs $ 56 $ 416 $ — $ — $ — $ — $ 309 $ 781

Commercial and Financial

December 31, 2022 2022 2021 2020 2019 2018 Prior Revolving Loans Amortized Cost Basis Total

Excellent $ 3,163 $ 445 $ 411 $ 474 $ — $ — $ 3,003 $ 7,496

5 unchanged sentences

Total $ 86,734 $ 60,207 $ 28,510 $ 12,709 $ 3,525 $ 1,532 $ 113,973 $ 307,190

Gross write-offs for period $ 1,878 $ 261 $ 181 $ 136 $ 122 $ 10 $ 626 $ 3,214

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Construction, 1 to 4 Family Residential

7 unchanged sentences

Total $ 8,096 $ 6,602 $ — $ — $ — $ — $ 65,557 $ 80,255

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Gross write-offs for period $ 149 $ 1,019 $ — $ — $ — $ — $ 234 $ 1,402

Construction, Land Development and Commercial

December 31, 2022 2022 2021 2020 2019 2018 Prior Revolving Loans Amortized Cost Basis Total

Excellent $ — $ 250 $ — $ — $ — $ 106 $ 1,292 $ 1,648

5 unchanged sentences

Total $ 42,101 $ 16,223 $ 9,045 $ 2,582 $ 274 $ 1,420 $ 242,233 $ 313,878

Gross write-offs for period $ 456 $ 187 $ — $ 9 $ — $ — $ 12 $ 664

Mortgage, Farmland

December 31, 2022 2022 2021 2020 2019 2018 Prior Revolving Loans Amortized Cost Basis Total

Excellent $ 1,966 $ 4,469 $ 1,928 $ 177 $ — $ — $ 100 $ 8,640

5 unchanged sentences

Total $ 58,747 $ 96,287 $ 55,048 $ 28,480 $ 4,521 $ 10,597 $ 27,484 $ 281,164

Gross write-offs for period $ 21 $ — $ — $ — $ — $ — $ — $ 21

Mortgage, 1 to 4 Family First Liens

December 31, 2022 2022 2021 2020 2019 2018 Prior Revolving Loans Amortized Cost Basis Total

Excellent $ 446 $ 1,405 $ 1,165 $ 338 $ — $ 661 $ — $ 4,015

5 unchanged sentences

Total $ 228,682 $ 385,758 $ 207,996 $ 150,708 $ 51,717 $ 166,508 $ 29,927 $ 1,221,296

Gross write-offs for period $ — $ 120 $ 25 $ 46 $ 14 $ 31 $ 1 $ 237

HILLS BANCORPORATION

9 unchanged sentences

Total $ 11,636 $ 14,371 $ 9,938 $ 7,954 $ 4,085 $ 9,087 $ 87,453 $ 144,524

Gross write-offs for period $ 24 $ 34 $ 77 $ 25 $ 15 $ 44 $ 11 $ 230

Mortgage, Multi-Family

December 31, 2022 2022 2021 2020 2019 2018 Prior Revolving Loans Amortized Cost Basis Total

Excellent $ — $ 5,806 $ 2,992 $ 3,093 $ — $ 113 $ — $ 12,004

5 unchanged sentences

Total $ 85,913 $ 163,303 $ 99,667 $ 70,128 $ 1,418 $ 23,180 $ 27,400 $ 471,009

Gross write-offs for period $ — $ 83 $ 18 $ — $ — $ — $ — $ 101

Mortgage, Commercial

December 31, 2022 2022 2021 2020 2019 2018 Prior Revolving Loans Amortized Cost Basis Total

Excellent $ 1,469 $ 1,519 $ 555 $ 16,733 $ — $ 570 $ — $ 20,846

5 unchanged sentences

Total $ 51,929 $ 92,034 $ 85,024 $ 87,724 $ 12,064 $ 27,253 $ 60,642 $ 416,670

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Gross write-offs for period $ 7 $ — $ 761 $ — $ — $ — $ — $ 768

Loans to Individuals

December 31, 2022 2022 2021 2020 2019 2018 Prior Revolving Loans Amortized Cost Basis Total

Excellent $ — $ — $ — $ — $ — $ — $ — $ —

5 unchanged sentences

Total $ 28,167 $ 7,032 $ 3,150 $ 1,158 $ 277 $ 157 $ 264 $ 40,205

Gross write-offs for period $ 1,064 $ 101 $ 33 $ 11 $ 7 $ — $ 3 $ 1,219

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Obligations of State and Political Subdivisions

7 unchanged sentences

Total $ 1,381 $ 2,744 $ 787 $ 4,396 $ 1,590 $ 27,202 $ 8,346 $ 46,446

Gross write-offs for period $ — $ — $ — $ — $ — $ — $ — $ —

Excellent $ 7,336 $ 14,643 $ 7,051 $ 20,911 $ 10 $ 5,993 $ 10,466 $ 66,410

Good 72,266 127,257 54,680 59,345 5,609 31,395 84,327 434,879

Satisfactory 416,592 548,815 364,166 217,453 65,997 193,915 478,752 2,285,690

Monitor 99,337 134,262 61,425 61,523 5,147 23,485 129,631 514,810

Special Mention 15,140 13,101 8,618 3,097 1,457 5,700 19,306 66,419

Substandard 12,141 22,446 7,307 6,269 2,707 7,361 11,984 70,215

Total $ 622,812 $ 860,524 $ 503,247 $ 368,598 $ 80,927 $ 267,849 $ 734,466 $ 3,438,423

Gross write-offs for period $ 3,655 $ 2,221 $ 1,095 $ 227 $ 158 $ 85 $ 1,196 $ 8,637

HILLS BANCORPORATION

42 unchanged sentences

The Company does not have a significant amount of loans that are past due less than 90 days where there are serious doubts as to the ability of the borrowers to comply with the loan repayment terms.

Accruing loans past due 90 days or more decreased $ 0.01 million from December 31, 2022 to December 31, 2023.

Accruing loans past due 90 days or more increased $ 0.32 million from December 31, 2023 to December 31, 2024.

As of December 31, 2024 and 2023, accruing loans past due 90 days or more were 0.03 % and 0.02 % of total loans, respectively.

5 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Certain nonaccrual and TDR loan information by loan type at December 31, 2023 and 2022 was as follows:

Certain nonaccrual loan information by loan type at December 31, 2024 and 2023 was as follows:

December 31, 2024 December 31, 2023

loans (1) Interest income recognized on non-accrual Accruing loans

days or more Nonaccrual

loans (1) Interest income recognized on non-accrual Accruing loans

days or more TDR

Total Non-accrual loans Nonaccrual with no ACL Total Non-

loans Nonaccrual with no ACL

(Amounts In Thousands) (Amounts In Thousands)

10 unchanged sentences

$ 23,926 $ 23,460 $ 30,888 $ 29,902

(1) There were $ 1.75 million of TDR loans included within nonaccrual loans as of December 31, 2022.

The increase in nonaccrual loans as of December 31, 2023 compared to December 31, 2022 is primarily due to two significant relationships accounting for approximately 94 % of the increase.

As of December 31, 2023, nonaccrual loans had no ACL allocation recorded except for $0.10 million recorded for 1 to 4 family first lien mortgages.

As of December 31, 2022, nonaccrual loans had ACL allocations as follows:

$0.04 million for 1 to 4 family first lien mortgages and $0.06 for 1 to 4 family construction loans.

The Company may modify the terms of a loan to maximize the collection of amounts due.

Such a modification was considered a troubled debt restructuring (“TDR”) prior to adoption of ASU 2022-02 on January 1, 2023.

In most cases, the modification is a reduction in interest rate, conversion to interest only payments or an extension of the maturity date.

The borrower is experiencing financial difficulties or is expected to experience financial difficulties in the near-term, so a concessionary modification is granted to the borrower that would otherwise not be considered.

TDR loans accrue interest as long as the borrower complies with the revised terms and conditions and has demonstrated repayment performance at a level commensurate with the modified terms over several payment cycles.

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Below is a summary of information for TDR loans as of December 31, 2022:

December 31, 2022

contracts Recorded

investment Commitments

(Dollar Amounts In Thousands)

Agricultural 1 $ 20 $ 100

Commercial and financial 11 1,379 49

Construction, 1 to 4 family residential 1 105 —

Construction, land development and commercial 1 191 —

Mortgage, farmland 4 1,578 —

Mortgage, 1 to 4 family first liens 8 1,156 —

Mortgage, 1 to 4 family junior liens 1 19 —

Mortgage, multi-family 1 620 —

Mortgage, commercial 9 2,584 —

Loans to individuals — — —

37 $ 7,652 $ 149

A summary of TDR loans that were modified during the year ended December 31, 2022 was as follows:

December 31, 2022

Contracts Pre-modification

investment Post-modification

( Dollar Amounts In Thousands)

Agricultural — $ — $ —

Commercial and financial 2 1,032 1,032

Construction, 1 to 4 family residential 1 105 105

Construction, land development and commercial 1 191 191

Mortgage, farmland 2 1,021 1,021

Mortgage, 1 to 4 family first liens — — —

Mortgage, 1 to 4 family junior liens — — —

Mortgage, multi-family — — —

Mortgage, commercial 1 274 274

Loans to individuals — — —

7 $ 2,623 $ 2,623

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company allocated $ 0.06 million of allowance for TDR loans and had commitments to lend $ 0.15 million in additional borrowings to restructured loan customers as of December 31, 2022.

These commitments were in the normal course of business.

The additional borrowings were not used to facilitate payments on these loans.

The modifications of the terms of loans performed during the year ended December 31, 2022 included extensions of the maturity date.

There were no TDR loans modified that were in payment default (defined as past due 90 days or more) during the year ended December 31, 2022.

The allowance for credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon asset origination or acquisition.

5 unchanged sentences

If the borrower continues to experience financial difficulty, another concession, such as principal forgiveness, may be granted.

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table shows the amortized cost basis at the end of the reporting period of the loans modified to borrowers experiencing financial difficulty, disaggregated by class of financing receivable and type of concession granted (numbers in thousands):

Loan Modifications Made to Borrowers Experiencing Financial Difficulty

Term Extension

Amortized Cost Basis at December 31, 2023 % of Total Class of Financing Receivable

Mortgage, Farmland $ 1,219 0.43 %

Agricultural 2,556 2.21 %

Mortgage, commercial 312 0.07 %

Year Ended December 31, 2024 Year Ended December 31, 2023

Amortized Cost Basis at December 31, 2024 % of Total Class of Financing Receivable Amortized Cost Basis at December 31, 2023 % of Total Class of Financing Receivable

Mortgage, Farmland $ 2,188 Term extension 0.79 % $ 1,219 Term extension 0.43 %

Agricultural 1,999 Term extension 1.68 % 2,556 Term extension 2.21 %

Mortgage, commercial 1,214 Term extension 0.24 % 312 Term extension 0.07 %

Construction land development and commercial 1,555 Term extension 0.56 % — —%

Commercial and financial 1,717 Term extension 0.57 % — —%

Total $ 8,673 $ 4,087

The following table describes the financial effect of the modifications made to borrowers experiencing financial difficulty:

Term Extension

Loan Type Financial Effect

Year Ended December 31, 2024 Year Ended December 31, 2023

Loan Type Financial Effect Loan Type Financial Effect

Mortgage, Farmland Provided a payment deferral, which temporarily reduced monthly payment amounts for the borrowers.

Mortgage, Farmland Added a weighted-average 5.3 years to the life of loans, which reduced monthly payment amounts for the borrowers.

Agricultural Added a weighted-average 5.3 year to the life of loans, which reduced monthly payment amounts for the borrowers.

Agricultural Added a weighted-average 0.08 year to the life of loans, which reduced monthly payment amounts for the borrowers.

Mortgage, commercial Added a weighted-average 3.6 year to the life of loans, which reduced monthly payment amounts for the borrowers.

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Mortgage, commercial None

Construction land development and commercial Added a weighted-average 5.2 year to the life of loans, which reduced monthly payment amounts for the borrowers.

Construction land development and commercial None

Commercial and financial Added a weighted-average 2.2 year to the life of loans, which reduced monthly payment amounts for the borrowers.

Commercial and financial Added a weighted-average 5.1 year to the life of loans, which reduced monthly payment amounts for the borrowers.

Upon the Company's determination that a modified loan (or portion of a loan) has subsequently been deemed uncollectible, the loan (or a portion of the loan) is written off.

Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the allowance for credit losses is adjusted by the same amount.

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

There were no financing receivables that had a payment default during the period and were modified in the 12 months before default to borrowers experiencing financial difficulty.

1 unchanged sentence

The following table depicts the performance of loans that have been modified in the last 12 months (numbers in thousands):

Payment Status (Amortized Cost Basis)

Payment Status (Amortized Cost Basis) for Year Ended December 31, 2024

Current 30-89 Days Past Due 90+ Days Past Due

1 unchanged sentence

Agricultural 1,999 — —

Mortgage, commercial 798 416 —

Construction land development and commercial 1,555 — —

Commercial and financial 1,301 — 416

$ 7,841 $ 416 $ 416

Payment Status (Amortized Cost Basis) for Year Ended December 31, 2023

Current 30-89 Days Past Due 90+ Days Past Due

Mortgage, Farmland $ 1,219 $ — $ —

Agricultural 2,556 — —

Mortgage, commercial 312 — —

$ 4,087 $ — $ —

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following tables present the amortized cost basis of collateral dependent loans, by the primary collateral type, which are individually evaluated to determine expected credit losses, and the related ACL allocated to these loans as of December 31, 2024 and 2023:

15 unchanged sentences

$ 33,269 $ — $ 226 $ — $ 33,495 $ 222

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Primary Type of Collateral

15 unchanged sentences

The changes in the ACL in 2024 compared to 2023 is the result of the following factors:

slight increase in forecasted Iowa unemployment used in the ACL calculation which resulted in an increase of $ 0.27 million;

increase in loan volume which resulted in an increase of $ 1.81 million;

changes in prepayment and curtailment rates resulting in an increase of $ 1.74 million;

increases in the individually analyzed loans reserve of $ 0.55 million;

increases in qualitative factors determined necessary by management which resulted in a decrease of $ 0.97 million and an increase of $ 4.57 million due to increased charge-offs and therefore higher loss rates.

The increase in the allowance for credit losses on off-balance sheet credit exposures is primarily a result of a significant outstanding unfunded commitment and increased loss rates as of December 31, 2023.

Iowa unemployment remained steady throughout 2024, therefore management's unemployment forecast when considering improvements in national unemployment forecasts was adjusted lower overall which resulted in a decrease to the ACL;

slight decrease in loan volume which resulted in a decrease;

changes in prepayment and curtailment rates resulting in an increase;

decreases in the individually analyzed loans

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

changes in qualitative factors determined necessary by management which resulted in a decrease;

and an increase due to increased charge-offs and therefore higher loss rates.

The decrease in the allowance for credit losses on off-balance sheet credit exposures is primarily a result of decreased outstanding unfunded commitments as of December 31, 2024.

The extent to which collateral secures collateral-dependent loans is provided in the previous individually analyzed loans table and changes in the extent to which collateral secures its collateral-dependent loans are described below.

Collateral-dependent loans increased $ 26.77 million from December 31, 2022 to December 31, 2023.

Collateral-dependent loans decreased $ 6.85 million from December 31, 2023 to December 31, 2024.

Collateral-dependent loans include any loan that has been placed on nonaccrual status, accruing loans past due 90 days or more and loans made to borrowers with financial difficulties.

1 unchanged sentence

Collateral-dependent loans were 0.97 % of loans held for investment as of December 31, 2024 and 1.17 % as of December 31, 2023.

The increase in collateral-dependent loans is due to an increase in loans modified due to financial difficulties of $ 4.09 million, an increase in nonaccrual loans of $ 24.07 million, an increase of $ 1.36 million in loans with a specific reserve and is offset by a decrease in 90 days or more accruing loans of $ 0.01 million and former individually analyzed loans totaling $ 2.44 million being classified as pooled loans as of December 31, 2023 for purposes of the ACL calculation due to having similar risk characteristics as pooled loans.

The decrease in collateral-dependent loans is primarily due to a decrease in nonaccrual loans of $ 6.96 million.

There were no significant changes noted in the extent to which collateral secures collateral-dependent loans.

The Company regularly reviews a substantial portion of the loans in the portfolio and assesses whether the loans share common risk characteristics for which expected credit loss is measured on a pool basis or if the loans do not share common risk

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

characteristics and therefore expected credit loss is measured on an individual loan basis.

If the loans are assessed for credit losses on an individual basis, the Company determines if a specific allowance is appropriate.

17 unchanged sentences

Any information utilized in addition to the appraisal is intended to identify additional charge-offs or provisions, not to override the appraised value.

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Property and Equipment

8 unchanged sentences

The Bank leases branch offices, parking facilities and certain equipment under operating leases.

The leases have remaining lease terms of 1 year to 10.5 years, some of which include options to extend the leases for up to 10 years, and some of which

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

include options to terminate the leases within 1 year.

The leases have remaining lease terms of 2 years to 10 years, some of which include options to extend the leases for up to 10 years, and some of which include options to terminate the leases within 4 years.

As the options are reasonably certain to be exercised, they are recognized as part of the right-of-use assets and lease liabilities.

1 unchanged sentence

Included in this were $ 0.46 million and $ 0.43 million of operating lease costs, respectively, $ 0.03 million and $ 0.03 million of short term lease costs, respectively, and $ 0.06 million and $ 0.04 million of variable lease costs, respectively.

For the years ended December 31, 2023 and 2022, cash paid for amounts included in the measurement of operating lease liabilities was $ 0.42 million and $ 0.50 million, respectively, and right-of-use assets obtained in exchange for lease obligations was $ 0.31 million and none , respectively.

For the years ended December 31, 2024 and 2023, cash paid for amounts included in the measurement of operating lease liabilities was $ 0.46 million and $ 0.42 million, respectively, and right-of-use assets obtained in exchange for lease obligations was none and $ 0.31 million, respectively.

As of December 31, 2024 and 2023, operating lease right-of-use assets included in other assets were $ 1.87 million and $ 2.13 million, respectively.

9 unchanged sentences

Total operating lease liabilities $ 1,970

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Interest - Bearing Deposits

6 unchanged sentences

$ 2,765,090 $ 2,682,382

Brokered deposits totaled $ 24.22 million and $ 31.74 million as of December 31, 2023 and 2022, respectively, with an average interest rate of 5.35 % and 2.60 % as of December 31, 2023 and 2022, respectively.

Brokered deposits totaled $ 34.75 million and $ 24.22 million as of December 31, 2024 and 2023, respectively, with a weighted average interest rate of 4.51 % and 5.35 % as of December 31, 2024 and 2023, respectively.

As of December 31, 2024, brokered deposits of $ 34.75 million are included in savings deposits.

At December 31, 2023, brokered deposits of $ 24.22 million were included in savings deposits .

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Time deposits have a maturity as follows:

11 unchanged sentences

(Amounts In Thousands)

Federal funds purchased, interest rates 4.50 % to 4.85 %

Federal funds purchased, FHLB, interest rate 4.62 %

$ 437,636 $ —

Bank Term Funding Program, interest rates 2024 4.76 %;

The Company has federal funds lines available totaling $ 175.00 million and $ 77.94 million from multiple correspondent banking relationships as of December 31, 2023 and 2022, respectively, that is secured by available for sale securities.

The weighted average interest rate on these borrowings outstanding as of December 31, 2023 and 2022 was 5.31 % and 4.72 %, respectively.

The Company has a bank term funding program line available totaling $ 81.33 million as of December 31, 2023 that is secured by available for sale securities.

109,000 219,000

$ 546,636 $ 219,000

The Company has federal funds lines available totaling $ 175.00 million from multiple correspondent banking relationships as of December 31, 2024 and 2023, respectively, that is secured by available for sale securities.

The Company's bank term funding program borrowings are secured by available for sale securities.

The weighted average interest rate on these borrowings outstanding as of December 31, 2024 was 4.77 %.

The Company's FHLB federal funds purchased are secured by collateral provided by the Company's 1 to 4 family residential, commercial and agricultural real estate first mortgages as discussed in Note 8.

The weighted average interest rate on these borrowings outstanding as of December 31, 2024 was 5.31 %.

The Company also has availability to borrow from the Federal Reserve Bank Discount Window of $ 100 million as of December 31, 2024 that is secured by available for sale securities.

4 unchanged sentences

(Effective interest rates as of December 31, 2024) (Amounts In Thousands)

Overnight borrowing, 4.60 %

Due 2024, 5.49 % to 5.66 %

$ — $ 296,648

On December 21, 2021 the Company paid $ 105.00 million in FHLB Borrowings due in 2025 through 2027.

Fees incurred with the 2021 prepayments were $ 7.69 million and were recorded in other noninterest expenses.

Due 2025, 4.49 % to 5.31 %

Due 2027, 3.87 % to 4.58 %

$ 127,050 $ —

To participate in the FHLB advance program, the Company is required to have an investment in FHLB stock.

2 unchanged sentences

The Company has the ability to borrow against 1-4 family first mortgages, agricultural real estate, commercial real estate and multi-family loans totaling $ 996.70 million as of December 31, 2024 and $ 1,078.91 million as of December 31, 2023 and there was $ 564.69 million and $ 296.65 million borrowed against this collateral as of December 31, 2024 and 2023, respectively.

See Note 7 for federal funds purchased.

Accumulated Other Comprehensive Loss

The components of accumulated other comprehensive income (AOCI), included in stockholders’ equity, are as follows:

The components of accumulated other comprehensive loss (AOCI), included in stockholders’ equity, are as follows:

(amounts in thousands)

15 unchanged sentences

To the extent that shares of common stock held by the ESOP are not readily traded, a sponsor must reflect the maximum cash obligation related to those securities outside of stockholders' equity.

The Company obtains a quarterly independent

The Company obtains a quarterly independent appraisal of the shares of stock.

As of December 31, 2024 and 2023, the shares held by the ESOP, fair value and maximum cash obligation were as follows:

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

appraisal of the shares of stock.

As of December 31, 2023 and 2022, the shares held by the ESOP, fair value and maximum cash obligation were as follows:

Shares held by the ESOP 670,236 679,592

34 unchanged sentences

Significant assumptions at the date of grant on May 14, 2024 include the risk-free interest rate of 4.35 %, expected option life of 7.5 years, expected volatility of 39 % and expected dividends of 1.62 %.

There were no stock options granted in 2023 and 2022.

There were 3,528 and zero stock options granted in 2024 and 2023, respectively.

The intrinsic value of options exercised was $ 0.00 million, $ 0.00 million and $ 0.26 million for 2024, 2023 and 2022, respectively.

9 unchanged sentences

Balance, December 31, 2021 13,025 $ 45.92 3.47 288

Exercised ( 7,220 )

1 unchanged sentence

Balance, December 31, 2023 5,805 $ 62.00 5.40 $ 23

Granted 3,528

Balance, December 31, 2024 9,333 $ 64.27 6.28 $ 72

Other pertinent information related to the options outstanding at December 31, 2024 is as follows:

1 unchanged sentence

62.00 5,805 53 months 5,805

68.00 3,528 113 months —

As of December 31, 2024, the outstanding options have a weighted-average exercise price of $ 64.27 per share and a weighted average remaining contractual term of 6.28 years.

1 unchanged sentence

The cost is expected to be recognized over a weighted-average period of 4.40 years.

As of December 31, 2023, there were zero vested option shares.

As of December 31, 2024, there were 5,805 vested option shares.

As of December 31, 2024, 162,144 shares were available for stock options and awards under the 2020 Stock Option and Incentive Plan (2020 Plan).

42 unchanged sentences

Prepaid expenses 499 495

Other 178 354

Gross deferred tax liabilities $ 2,644 $ 2,708

67 unchanged sentences

Reserve balances totaled none as of December 31, 2024 and 2023.

Related Party Transactions

Certain directors of the Company and the Bank, companies with which the directors are affiliated, and certain principal officers are customers of, and have banking transactions with, the Bank in the ordinary course of business.

Such indebtedness has been incurred on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons.

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Related Party Transactions

Certain directors of the Company and the Bank, companies with which the directors are affiliated, and certain principal officers and immediate family members are customers of, and have banking transactions with, the Bank in the ordinary course of business.

Such indebtedness has been incurred on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons.

The following is an analysis of the changes in the loans to related parties during the years ended December 31, 2024 and 2023:

2 unchanged sentences

Balance, beginning $ 73,337 $ 73,039

Net (decrease) increase due to change in related parties 714 ( 986 )

Net increase due to change in related parties 4,972 714

Advances 18,408 27,689

3 unchanged sentences

Deposits from related parties are accepted subject to the same interest rates and terms as those from nonrelated parties.

Letters of credit with these related parties totaled $ 1.00 million and $ 1.01 million as of December 31, 2024 and 2023, respectively, and were done under the same terms as those with nonrelated parties.

HILLS BANCORPORATION

28 unchanged sentences

Interest-bearing deposits 2,765,090 2,767,730 — 2,767,730 —

Other borrowings 219,000 219,164 — 219,164 —

Other short-term borrowings 546,636 547,530 — 547,530 —

Federal Home Loan Bank borrowings 127,050 126,127 — 126,127 —

40 unchanged sentences

Federal Home Loan Bank borrowings 296,648 297,148 — 297,148 —

Interest rate swaps 233 233 — 233 —

Accrued interest payable 6,102 6,102 — 6,102 —

61 unchanged sentences

December 31, 2024

Readily Available

Assets Readily Available

Market Prices(1) Observable

7 unchanged sentences

Total $ 288,462 $ 655,674 $ — $ 944,136

Interest rate swaps $ — 93 $ — 93

December 31, 2023

Readily Available

Assets Readily Available

Market Prices(1) Observable

7 unchanged sentences

Total $ 422,490 $ 356,931 $ — $ 779,421

Interest rate swaps — 233 — 233

(1) Considered Level 1 under ASC 820.

9 unchanged sentences

For assets measured at fair value on a nonrecurring basis that were still held on the balance sheet at December 31, 2024 and 2023, the following tables provide the level of valuation assumptions used to determine the adjustment and the carrying value of the related individual assets at year end.

December 31, 2023 Year Ended December 31, 2023

December 31, 2024

Prices(1) Observable

1 unchanged sentence

Prices(3) Total at

Fair Value Total (Gains) Losses

(Amounts in Thousands)

19 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2022 Year Ended December 31, 2022

December 31, 2023

Prices(1) Observable

1 unchanged sentence

Prices(3) Total at

Fair Value Total

(Amounts in Thousands)

66 unchanged sentences

(Increase) decrease in other assets ( 29 ) ( 52 ) 771

(Decrease) increase in other liabilities ( 529 ) 28 290

Increase (decrease) in other liabilities 96 ( 529 ) 28

Net cash and cash equivalents provided by operating activities 23,895 17,052 13,737

4 unchanged sentences

Proceeds from the issuance of common stock through the employee stock purchase plan 362 398 417

Capital contribution to subsidiary — — —

Excise tax paid on purchase of treasury stock ( 56 ) — —

Dividends paid ( 10,051 ) ( 9,688 ) ( 9,304 )

6 unchanged sentences

Noncash financing activities:

(Decrease) increase in maximum cash obligation related to ESOP shares $ ( 6,158 ) $ 998 $ 2,684

Increase (decrease) in maximum cash obligation related to ESOP shares $ 3,404 $ ( 6,158 ) $ 998

Commitments and Contingencies

59 unchanged sentences

Collateral must be posted when the market value exceeds certain threshold limits which are determined by credit ratings of each counterparty.

The Bank entered into one interest rate swap agreement in November 2023 and was required to pledge a US Treasury in the amount of approximately $ 500 thousand of collateral as of December 31, 2023.

The Bank did not have any derivative financial instruments as of December 31, 2022.

The Bank entered into one interest rate swap agreement in November 2023 and was required to pledge a US Treasury in the amount of approximately $ 250 thousand and $ 500 thousand of collateral as of December 31, 2024 and 2023, respectively.

Cash Flow Hedges:

The Bank executed one forward-starting interest rate swap transaction on November 28, 2023.

The interest rate swap transaction had an effective date of December 15, 2023, and an expiration date of May 15, 2025 , effectively converting $ 2.10 million of variable rate debt to fixed rate debt.

The interest rate swap transaction had an effective date of December 15, 2023, and an expiration date of May 15, 2025 , effectively converting variable rate debt to fixed rate debt.

For accounting purposes, this swap transaction was designated as a cash flow hedge of the changes in cash flows attributable to changes in the effective federal funds rate, the benchmark interest rate being hedged, associated with the interest payments made on an amount of the Bank’s debt principal equal to the then-outstanding swap notional amount.

The underlying principal balance will be matched to future planned advances related to a large customer construction project, however, the FHLB advances will remain equal to the notional amount of the swap making it probable that sufficient effective federal funds rate based interest payments would exist through the maturity date of the swap.

The table below identifies the balance sheet category and fair value of the Bank’s derivative instrument designated as a cash flow hedge as of December 31, 2023:

The table below identifies the balance sheet category and fair value of the Bank’s derivative instrument designated as a cash flow hedge as of December 31, 2024 and 2023:

Value Balance

3 unchanged sentences

Interest rate swap $ 42,150 $ ( 93 ) Other Liabilities 5/15/2025

The table below identifies the losses recognized on the Bank’s derivative instrument designated as cash flow hedges for the year ended December 31, 2023:

December 31, 2023

Interest rate swap $ 2,100 $ ( 233 ) Other Liabilities 5/15/2025

The table below identifies the losses recognized on the Bank’s derivative instrument designated as cash flow hedges for the year ended December 31, 2024 and 2023:

Recognized in Other Comprehensive Loss Reclassified from AOCI into Income Recognized in Income on Derivatives

Amount of (Loss) Category Amount of Gain (Loss) Category Amount of Gain (Loss)

Amount of Gain (Loss) Category Amount of Gain (Loss) Category Amount of Gain (Loss)

(Amounts in Thousands)

1 unchanged sentence

Interest rate swap $ 106 Interest Expense $ — Other Income $ —

December 31, 2023

Interest rate swap $ ( 177 ) Interest Expense $ — Other Income $ —

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Segment Reporting

The Company conducts operations through one reportable segment which is determined by the Senior Executive Committee, which is designated the chief operating decision maker, based upon information provided about the Company's products and services offered, primarily banking operations.

The Executive Committee consists of the Chief Executive Officer, Chief Financial Officer and President/Chief Operating Officer.

The segment is also distinguished by the level of information provided to the Executive Committee, who uses such information to review performance of various components of the business (such as branches), which are then aggregated if operating performance, products/services, and customers are similar.

The Executive Committee will evaluate the financial performance of the Company's business components such as by evaluating revenue streams, significant expenses, and budget to actual results in assessing the Company's segment and in the determination of allocating resources.

The Executive Committee uses revenue streams to evaluate product pricing and significant expenses to assess performance and evaluate return on assets.

The Executive Committee uses consolidated net income to benchmark the Company against its competitors.

The benchmarking analysis coupled with monitoring of budget to actual results are used in assessing performance and in establishing compensation.

Loans, investments, and deposits provide the revenues in the banking operation.

Interest expense, credit loss expense, and payroll provide the significant expenses in the banking operation.

All operations are domestic.

Accounting policies for segments are the same as those described in Note 1.

Segment performance is evaluated using consolidated net income from the consolidated statements of income.

Significant income and expenses are included on the consolidated statements of income.

These include interest income, interest expense, net interest income, and noninterest income.

Significant expenses used in evaluating Company performance are credit loss expense and salaries and employee benefits which are included on the consolidated statements of income.

HILLS BANCORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Subsequent Events

2 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk